Liquidity and performance of actively managed equity funds

Fang, Rong (2011) Liquidity and performance of actively managed equity funds. PhD thesis, University of Nottingham.

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Most scholars have concluded that actively managed equity mutual funds as a whole underperform their passively managed counterparts, linked to some benchmarks. In other words, active equity fund managers on average do not have enough significant stock-picking abilities to add value for investors. However, earlier investigations may be flawed through failure to give adequate consideration to liquidity. Hence, this research pays much attention to liquidity effects on mutual fund performance and argues that it is a preference for holding highly liquid stocks which results in the perceived underperformance.

First, we find no significant liquidity premium at fund level, no matter the holding period returns or risk-adjusted performance. This indicates that all or almost all active equity fund managers in effect pay considerable attention to liquidity. We also examine the effects of liquidity on fund performance among actively managed equity funds. In contrast with earlier research, we find that actively managed equity funds in the aggregate perform close to the passive strategy. That means, on average, active equity fund managers do at least have talent sufficient to generate returns to cover costs that their funds impose on investors. This we attribute to the liquidity requirement of mutual funds. Moreover, using bootstrap simulation, we discover that many more mutual funds can be classified as skilled funds rather than lucky funds, once a liquidity factor has been included. Thus, our research provides a new insight into mutual fund performance, and highlights liquidity as an important and non-negligible determinant in the evaluation of mutual fund performance.

Item Type: Thesis (University of Nottingham only) (PhD)
Supervisors: Newton, D.
Liu, W.
Keywords: equity funds, mutual funds, fund managers, bootstrap simulation, liquidity
Subjects: H Social sciences > HG Finance
Faculties/Schools: UK Campuses > Faculty of Social Sciences, Law and Education > Nottingham University Business School
Item ID: 12133
Depositing User: EP, Services
Date Deposited: 23 Mar 2012 11:07
Last Modified: 19 Dec 2017 10:25

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